Belarus: On A Broken Path Of Reform

By Alena Sakhonchik

February 9, 2016

 

 

For Belarus, the new year kicked off with an economy in recession. National statistics recorded 12% inflation in 2015, while GDP has declined by 4% since 2014. The overall trade turnover has declined by about 26%, including a 27% decrease in trade with Russia alone. In the first quarter of 2015, investments from abroad in the real sector of the economy (excluding banks) also decreased by 29% in comparison to the corresponding period in 2014. Russia and the Netherlands are currently the top investors into Belarus, comprising 44% and 19% of all investments respectively in 2015.

The living standard of the population has also worsened, with household disposable incomes decreasing by 6% between 2014 and 2015. Employment data paint a similarly bleak picture. The replacement rate of workers—or the number of employees hired versus the number fired—amounted to 0.792 in November 2015. Overall, the population of Belarus has become significantly poorer in the last two years—a stark contrast to 2011 and 2012, when disposable income grew by almost 22%.

The recession, projected to continue throughout 2016, is a combination of both external and internal factors. Low oil prices and the resulting depreciation of the Russian ruble have emphasized Belarus’s own structural weaknesses. Following a series of crises in 2009, 2011, and 2014, this vicious cycle will continue to stunt the country’s economic development unless the government removes a number of key obstacles that are preventing reform.

Structural weaknesses: where they come from

Recent IMF assessments show that some of the structural weaknesses in Belarus today are the result of the country’s vulnerable financial sector. Since 2009, the authorities have responded to global and regional economic volatility by favoring price controls, exchange rate stabilization programs, and state-led investment. State attempts to preserve the exchange rate through market intervention resulted in the depletion of fiscal reserves and the accumulation of significant foreign debt. 

By October 2015, the country’s gross external debt accounted for 62% of GDP, and is projected to grow to between 76% and 87% in 2016. The total amount of gross government debt in Belarus accounted for 21% of GDP in October 2015, higher than in Russia and Kazakhstan, but lower than in Kyrgyzstan and Armenia. This is unsurprising, since the dominant part of Belarus’s economy is controlled by the state. Ironically, external credit has been generally re-directed to refinance Belarus’s previous debts, which are high priority for Minsk. Given these circumstances, the country is left with little to nothing to contribute to its own economic growth.  

Preferential treatment of state enterprises—most often in the agriculture and heavy industry sectors, where the system of production often follows the perverse incentives of the Soviet command economy—has exacerbated the problem. The resulting absence of flexibility makes it difficult to meet the demands of consumers in Eurasian and European markets. The net result of such policies is profit loss, the accumulation of unsold inventory, and distorted allocation of capital and labor.

Inverted legislative developments

The Belarusian private sector has little ability to absorb the workforce laid off from unprofitable state enterprises. Entrepreneurial initiative in the country continues to be hampered by high taxation used to cover the losses of unprofitable enterprises, unequal access to capital, excessive state interference, and continuously changing legislation.

For example, Decree No. 143 enacted in March 2015 requires entrepreneurs involved in retail trade to provide proof of origin for their goods, or pay non-compliance fines. Documents and certificates on retail goods required under this provision are difficult to obtain in Russia, where most retail goods come from. The idea behind the legislation is to encourage traders to sell domestically-produced goods, the demand for which remains very low. At the moment, the requirement has appeared as a time and cost-consuming procedure, which has pushed ordinary citizens from attending retail markets due to the shutdown of activities of individual entrepreneurs. 

Legislation is putting pressure the healthcare sector as well. On March 1 of this year, the Order of the President No. 475 will cancel mandatory licensing for public health clinics and hospitals, while tightening the conditions under which private healthcare providers can operate.

History as the checkpoint for reform

The key question is: what is the end goal of these reforms? So far, the government in Minsk has rejected any attempt on the part of international financial organizations or technical advisers to push Belarus toward structural reforms. The country will continuously face protracted stagnation unless the government gets over its fear of the unknown, citing the population’s unpreparedness as justification against action.

While structural reform does not necessarily induce growth in the short term, the long-term benefits to the country’s potential are clear. Cross-country comparisons of the United Nations Development Program’s Human Development Index (HDI) show that countries with a similar level of development have nearly twice the income level of Belarus. This indicator suggests that Belarus could realize higher returns on its relatively high development by adjusting its economic policies.

Given the lessons of the 1990s, effective interaction—which so far seems to be absent—between both state and supra-state institutions and the market should be at the heart of the country’s approach to reform in 2016.

As history shows, economic shocks are bound to continue, making it necessary for economies to reform and adapt to change. However, if resistance and protectionist attitudes prevail among the country’s politicians, and the population continues to lag behind in a sense of collective responsibility, then the first step in improving Belarus’s economy will need to start with a reform of the mind.


Alena Sakhonchik is a consultant in the World Bank’s Development Economics Unit, Global Indicators Group. The views and opinions expressed in this article are those of the author alone and do not reflect the position of the affiliated organization.

 

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